A two-judge bench of the Gujarat High Court has held that the tax recovery from the directors of a private company is possible only when the department fails to recover the same from the Company as this is the pre-condition for invoking section 179 of the Income Tax Act, 1961.
In the present case, the department proceeds against the former director of a private limited company for the assessment period where she was the director, who approached the High Court challenging the validity of the notices served on her.
Before the High Court, the writ applicant contended that for invoking the provisions of section 179 the pre-condition is that there should be a failure to recover the tax from the Company. It was also contended that the Directors would have joint and severally liable only on such an event.
Accepting the contentions of the writ-applicant, Justice J B Pardiwala and Justice B.D Karia held that the pre-condition for section 179 of the Act, that is, the fact that the tax dues could not be recovered from the Company., is not fulfilled by the income tax department in the present case.
“In the showcause notice, there is no whisper of any steps having been taken against the Company for recovery of the outstanding amount,” the bench said.
While quashing the order, the Court also allowed the department to further initiate the proceedings and held that “Such requirement is held to be pre-requisite and necessary condition to be fulfilled before an action under section 179 of the Act can be taken. In the context of section 179 of the Act, this Court held that before recovery in respect of the dues from a private company can be initiated against the directors, to make them jointly and severally liable for such dues, it is necessary for the Revenue to establish that such recovery cannot be made against the company and then alone it can reach to the directors who were responsible for the conduct of the business during the previous year in relation to which liability exists.
